Crypto and cash the scammers take it all

The man whose book actor Shilpa Shetty tweeted on 7 July 2017 would go on to script one of the largest ponzi schemes India has seen. Amit Bhardwaj’s GainBitcoin scam, unearthed in 2018, and which has since ballooned to $2.7 billion, enticed people to invest by promising them high returns in a short time-frame, but it did so using a little-known form of digital money at the time—cryptocurrency. Bhardwaj carried out his swindle almost in full public view—his Twitter handle and promotions for his book were a big part of his sales pitch.

For a large number of Indians, the GainBitcoin scheme was when they first heard about Bitcoin and cryptocurrency; for thousands, it was how they lost their life’s savings. For the scammers who followed Bhardwaj, it became a case study in what not to do—draw attention to themselves— and know exactly how much money to scam. That’s not all. If there is more awareness about cryptocurrency today, the traps being set are equally more sophisticated. Let’s see how some of them work.

The fake crypto exchange

On 21 June, researchers at security firm CloudSEK revealed that a fake crypto exchange scam had duped Indians of more than ₹1,000 crore.

The scam began with scammers creating multiple fake domains online, which impersonated a legitimate UK-based crypto trading platform called CoinEgg. The researchers found the word “CloudEgg” in all of these domains and said that the sites were “designed to replicate” the official website’s dashboard and user experience.

The scammers then created a fake social media profile of a woman “to approach the potential victim and establish a friendship”. She would “gift” a $100 credit to users and nudge them to start trading on the fake platforms. Once they did so, the dashboard would show that they were getting remarkable returns. This encouraged the victims to put in more money.

Soon, the scammers would freeze these accounts and stop any withdrawals. The fake CoinEgg website insisted users pay 22% of their earnings or deposits as “tax” before they could reclaim the funds. If earnings crossed $250,000, the exchanges would ask for additional deposits. By the time a user realized they had fallen for a scam, it would be too late.

It didn’t end there. The brazen attackers would then track down these users’ complaints about fake exchanges on social media and approach them from other fake accounts, posing as investigators. They would wheedle out personal information, ID cards and more, which could then be used to hack other accounts.

In a report covering the period from July 2020 to June 2021 published last year, blockchain analysis platform Chainalysis identified India as the second largest market for crypto. The firm noted that the number of people visiting scam websites from India has reduced. Even so, over 200,000 people in India visit such sites every month.

The CoinEgg scam might sound like something an educated person would never fall for, right? That’s what a 21-year-old business owner from Pune thought before he walked into just such a trap last month. After joining a group called ‘WazirX Discuss’ on Telegram on a friend’s recommendation, he started getting private messages from strangers who claimed they could help him invest in cryptocurrencies. That’s how he met ‘Jayant’, a member of that group.

Jayant directed him to a website and helped him create an account. As asked by the scammer, he deposited a few hundred dollars in USDT, a cryptocurrency that is commonly known as Tether, and is pegged on the dollar. He saw the money double in a matter of days. Excited, he deposited $3,000 (approximately ₹3 lakh) on the platform. But when he tried to withdraw the earnings on this deposit, the scammers froze his account, and said he needed to make an additional deposit of $5,000 (about ₹4 lakh). Speaking to Mint earlier this month, the Pune businessman said he has lost ₹5 lakh to the scam.

As part of the research for this story, this reporter joined the same Telegram group, and got private messages from no less than 13 people, dangling similar baits. The website in question remains active too, and is taking signups, despite posts on Reddit etc., about its fraudulent nature.

The peer-to-peer swindle

Kashif Raza, the co-founder of a platform called CryptoKanoon, is perhaps the best-known victim of a crypto scam in India. Raza took a personal loan at a massive 21% interest rate to invest in GainBitcoin in 2016-17 and lost it all. To recoup his losses, he also borrowed from friends and family and invested in other projects, which too failed. To do his bit, Raza launched a legal awareness and analytics platform called Crypto Kanoon back in 2018, which was acquired by crypto tax startup KoinX earlier this year.

“Even today, ponzi schemes do exist, but not on the scale it used to happen in 2017,” he said. The ones that exist, says Raza, don’t run on a national level anymore. Scammers deliberately stick to specific regions or cities in order to remain under the radar, though the money they’re making is still in lakhs.

A product manager working at a multinational firm in Delhi, told Mint, that his family and friends in a Haryana village have been entrapped in such a crypto scam. Some have even sold property to invest in the schemes being peddled by a group of swindlers that often baits victims at elaborate resort parties.

Raza said ponzi scammers have moved beyond word-of-mouth marketing. Instead, they buy followers on social media, buy Google ads, and even pay money to influencers in order to reach prospective victims. It’s a more evolved version of Amit Bhardwaj’s book.

This is how it works. “A group of people go to a village or a small town. They identify people with successful businesses and invite them to a hotel or a resort. They pitch their scheme, and convince them of abnormal returns,” says Dubai-based Mohammed Danish, the chief legal officer of a platform called Bitdrive Exchange.

Speaking to Mint, a senior industry executive, who has been among the founding members of two of the country’s oldest crypto exchanges, said scammers most often pose as rich individuals. “You have to act like you belong to the rich class. That’s the dream you’re selling—of getting rich quickly and entering the upper echelons of society. You throw around big names, drive expensive cars, and dress the part,” he said.

Another kind of scam is the peer-to-peer (P2P) scam, which happens over P2P crypto trading platforms. They first emerged in India after Reserve Bank of India’s ban on crypto back in 2017, which led more users to these platforms, since exchanges ceased to function.

Such platforms like Paxful connect sellers and buyers. They’re not exchanges and are quite well known in the crypto community. They allow a buyer to search for a seller (or vice versa) and hold their money in escrow till both parties have confirmed that a transaction has been completed in the means they want.

How do scammers leverage such a platform? At times, a buyer pays the money to the seller, and after a transaction is completed, they report it to the police as a fraudulent transaction. As part of the ensuing investigation, a stop payment is put on the transaction, and the buyer pockets the cryptocurrency he received from the seller for free.

But wouldn’t a seller dispute such a transaction? Danish, who has represented victims of scams as an independent lawyer since 2018, and also co-founded Crypto Kanoon with Raza, explained that the buyers keep the transactions small, usually under ₹25,000. Most people are reluctant to travel to remote areas, and spend money to recover trivial sums. The scammer, on the other hand, would make away with ₹25,000 each in crypto and fiat currency.

Another trick used by swindlers: they transfer the amount using a stolen card, or a hacked bank account. Since the seller only cares about receiving the money, they don’t verify the particulars. When the transaction is complete, the owner of the account contacts the bank and reports the transaction, which is then blocked by the lender. (RBI rules say customers aren’t liable if fraud happens through a third party.)

“There have been various cases where the KYC documents that the exchange (P2P platform) had were actually fabricated,” Danish said. But P2P platforms aren’t involved in such scams. In fact, Paxful even warns users about red flags in one of its blog posts: “This includes being rushed to complete trades, fake proof of transactions, coin locking situations, payment reversals, and phishing attempts.”

Danish says he is familiar with “numerous” such cases from places like Lucknow, Bengaluru, Mumbai, Delhi, Hyderabad and more. “People tend to approach a lawyer when they reach the stage where their accounts are frozen, and they see no solution in sight,” he said.

Catch me if you can

Danish has been involved in more than 50 crypto scam cases as a legal practitioner. The most common reason why scams aren’t caught is that users don’t approach the police, fearing pushback from the authorities. “They fear that the first question they’ll be asked is why did you invest in crypto?” Danish said. He also said police are reluctant to register an FIR (first information report), unless multiple people report the fraud, the way it was in the case of GainBitcoin.

It’s not that the police aren’t trying. The problem, often, is that cryptocurrency frauds are nigh impossible to track and trace, even using modern tools. “Cryptocurrency has become the de facto currency of money launderers, cybercriminals, international racketeers etc., who are using it as mode of payments because of its perfect anonymity,” said Triveni Singh, superintendent of police, cybercrime, Uttar Pradesh Police. “We cannot track many cases because of technical and legal limitations,” he added. He denied that police are reluctant to file FIRs.

Singh said that crimes where money is transacted through Bitcoin uses exchanges as middlemen, and exchanges often don’t keep complete KYC for users. The maximum information law enforcement agencies get are wallet addresses that are holding the crypto, and that’s not enough information to track down the ultimate beneficiaries of transactions. Most crypto wallets don’t reveal user information.

“Since there’s no regulation as such, there’s clear confusion about whether something is a legitimate crypto coin. 99.99% don’t understand blockchain technologies, how coins are minted, circulated, the algorithms, etc. That’s why we say that it’s a kind of a ponzi scheme. Ultimately it has to go bust, if there’s no regulation or regulator, and hasn’t been accepted by many countries,” he said. Singh was among the investigating officers who busted a ₹3,000 crore money laundering racket in Bareilly last year.

When police take the help of specialized agencies that track crypto wallets, and use specialized tools (like Mastercard’s CipherTrace), it fares better, says Singh. The success rate, though, is low, he admitted.

A bigger drawback is that most police constables are just not aware of the technicalities of cryptocurrencies. When the Pune-based businessman cited above approached the cyber cell, he said they did not know what USDT, CoinDCX or crypto trading are. “If the Cyber Cell won’t understand the problem, then how will it help?”

In a response to an RTI filed by Mint, the Pune Police said that it has six FIRs related to crypto scams in which investigation is ongoing at the moment. They also admitted that the Cyber Cell of the Pune Police has no personnel specialized in crypto, and that the police haven’t closed any crypto scam-related cases in 2021-2022.

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